U .S. home prices are set to fall further. There is nothing policymakers can do to forestall this, but there are things they can do to mitigate the severity of the decline. With Europe in disarray, the supercommittee struggling to reduce the federal deficit and a payroll tax increase looming next year, help for the housing industry could make the difference between a continued economic recovery and a double-dip recession.
House prices are currently being driven by distressed home sales — foreclosure and short sales. About a third of home sales nationwide involve distressed properties, an astounding figure. In the busted housing markets of Arizona, California, Florida and Nevada, the share is well over half. Distressed properties are often vacant and in disrepair, and thus sold at significant discounts. As the share of distressed sales grows, home prices fall.
House prices have been more stable in recent months, largely because legal and regulatory issues have slowed foreclosures and thus limited the number of distressed sales. A major impediment has been the state attorney generals’ lawsuit against the mortgage companies over the robo-signing fiasco and other foreclosure process problems. Once this suit is settled, the foreclosure machine will gear up again, distressed sales will increase, and house prices will resume their descent. Prices have already fallen by a third since the housing crash began six years ago.
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